BILL NUMBER: SB 93	CHAPTERED  04/12/99

	CHAPTER   8
	FILED WITH SECRETARY OF STATE   APRIL 12, 1999
	APPROVED BY GOVERNOR   APRIL 12, 1999
	PASSED THE ASSEMBLY   MARCH 25, 1999
	PASSED THE SENATE   MARCH 1, 1999
	AMENDED IN SENATE   FEBRUARY 11, 1999
	AMENDED IN SENATE   FEBRUARY 4, 1999

INTRODUCED BY   Senator Chesbro

                        DECEMBER 7, 1998

   An act to amend Section 17507.6 of the Revenue and Taxation Code,
relating to taxation, to take effect immediately, tax levy.


	LEGISLATIVE COUNSEL'S DIGEST


   SB 93, Chesbro.  Income and bank and corporation taxes:  IRS
restructuring and reform.
   The Personal Income Tax Law and the Bank and Corporation Tax Law
impose taxes on income and, among other things, provide for specified
conformity to federal income tax laws.  In this connection, the
federal Internal Revenue Service Restructuring and Reform Act of 1998
provides for, among other things, changes to the way the Internal
Revenue Service (IRS) is organized, additional taxpayer rights,
including a shifting of the burden of proof, and changes to the rules
as to how taxes are computed.
   This bill would provide for specified conformity to that federal
act with respect to early withdrawals of certain amounts converted
from IRAs to Roth IRAs, the determination of the 5-year holding
period with respect to the conversion of the Roth IRAs, certain
ordering rules to determine amounts that are withdrawn in the case
where a Roth IRA contains conversion amounts and other contributions,
corrections of erroneous conversions and due dates pertaining to
Roth IRAs, and clarification of the contribution limit to a Roth IRA.

   This bill would apply these changes to taxable years beginning on
or after January 1, 1998.
   This bill would take effect immediately as a tax levy.


THE PEOPLE OF THE STATE OF CALIFORNIA DO ENACT AS FOLLOWS:


  SECTION 1.  Section 17507.6 of the Revenue and Taxation Code is
amended to read:
   17507.6.  Section 408A of the Internal Revenue Code, relating to
Roth IRAs, is modified to additionally provide all of the following:

   (a) Section 408A(c)(3) of the Internal Revenue Code is modified as
follows:
   (1) By substituting the phrase "shall not exceed an amount equal
to the amount determined under paragraph (2)(A) for such taxable
year, reduced" in lieu of the phrase "shall be reduced" in Section
408A(c)(3)(A) of the Internal Revenue Code.
   (2) By substituting the phrase "in the case of a joint return or a
married individual filing a separate return" in lieu of the phrase
"in the case of a joint return" in Section 408A(c)(3)(A)(ii) of the
Internal Revenue Code.
   (3) By substituting the phrase "taxable year if, for the taxable
year of the distribution to which such contribution relates" in lieu
of the phrase "taxable year if" in Section 408A(c)(3)(B) of the
Internal Revenue Code.
   (4) By substituting the phrase "adjusted gross income exceeds" in
lieu of the phrase "adjusted gross income for such taxable year
exceeds" in Section 408A(c)(3)(B)(i) of the Internal Revenue Code.
   (5) By substituting the phrase "any amount included in gross
income under subsection (d)(3) shall not be taken into account" in
lieu of the phrase "any amount included in gross income under
subsection (d)(3) shall not be taken into account and the deduction
under Section 219 shall be taken into account" in Section 408A(c)(3)
(C)(i) of the Internal Revenue Code.
   (b) (1) Section 408A(d)(1) of the Internal Revenue Code shall not
apply and in lieu thereof any qualified distribution from a Roth IRA
shall not be includable in gross income.
   (2) Section 408A(d)(2)(B) of the Internal Revenue Code shall not
apply and in lieu thereof:
   (A) A payment or distribution from a Roth IRA shall not be treated
as a qualified distribution under Section 408A(d)(2)(A) of the
Internal Revenue Code if the payment or distribution is made within
the five-taxable year period beginning with the first taxable year
for which the individual made a contribution to a Roth IRA (or the
individual's spouse made a contribution to a Roth IRA) established
for that individual.
   (B) The term "qualified distribution" shall not include any
distribution of any contribution described in subdivision (g) and any
net income allocable to the contribution.
   (c) (1) If a taxpayer has made an election for federal purposes
under Section 408A(d)(3)(A)(iii) of the Internal Revenue Code, as
amended by Public Law 105-206, to not have Section 408A(d)(3)(A)(iii)
of the Internal Revenue Code, as amended by Public Law 105-206,
apply to any distributions during the 1998 taxable year, that
election shall be treated as an election to include in gross income
for purposes of this part all amounts required to be included in
gross income for the taxable year by reason of Section 408A(d)(3) of
the Internal Revenue Code.  A separate election for state purposes
may not be made under paragraph (3) of subdivision (e) of Section
17024.5 and the federal election shall be binding for purposes of
this part.
   (2) If a taxpayer fails to make an election for federal purposes
under Section 408A(d)(3)(A)(iii) of the Internal Revenue Code, as
amended by Public Law 105-206, to not have Section 408A(d)(3)(A)(iii)
of the Internal Revenue Code, as amended by Public Law 105-206,
apply to any distributions during a taxable year, Section 408A(d)(3)
(A)(iii) of the Internal Revenue Code shall apply to those
distributions for state purposes, no election under Section 408A(d)
(3)(A)(iii) of the Internal Revenue Code, as amended by Public Law
105-206, shall be allowed for state purposes, and a separate election
for state purposes shall not be allowed under paragraph (3) of
subdivision (e) of Section 17024.5.
   (d) In the case of a qualified rollover contribution to a Roth IRA
of a distribution to which Section 408A(d)(3)(A)(iii) of the
Internal Revenue Code, as amended by Public Law 105-206, applied, the
following rules shall apply:
   (1) (A) The amount required to be included in gross income for
each of the first three taxable years in the four-year period under
Section 408A(d)(3)(A)(iii) of the Internal Revenue Code shall be
increased by the aggregate distributions from Roth IRAs for the
taxable year which are allocable under Section 408A(d)(4) of the
Internal Revenue Code to the portion of the qualified rollover
contribution required to be included in gross income under Section
408A(d)(3)(A)(i) of the Internal Revenue Code.
   (B) The amount required to be included in gross income for any
taxable year under Section 408A(d)(3)(A)(iii) of the Internal Revenue
Code shall not exceed the aggregate amount required to be included
in gross income under Section 408A(d)(3)(A)(iii) of the Internal
Revenue Code for all taxable years in the four-year period (without
regard to subparagraph (A)) reduced by amounts included for all
preceding taxable years.
   (2) (A) If the individual required to include amounts in gross
income under Section 408A(d)(3)(A)(iii) of the Internal Revenue Code
dies before all the amounts are included, all remaining amounts shall
be included in gross income for the taxable year which includes the
date of death.
   (B) (i) If the spouse of the individual described in subparagraph
(A) acquires the individual's entire interest in any Roth IRA to
which the qualified rollover contribution is properly allocable and
makes an election for federal purposes under Section 408A(d)(3)(E) of
the Internal Revenue Code, as amended by Public Law 105-206, to
treat the remaining amounts described in subparagraph (A) as
includable in the spouse's gross income in the taxable years of the
spouse ending with or within the taxable years of the individual in
which the amounts would otherwise have been includable, subparagraph
(A) shall not apply for state purposes, a separate election for state
purposes shall not be allowed under paragraph (3) of subdivision (e)
of Section 17024.5, the federal election shall be binding for
purposes of this part and that election shall be treated as an
election to treat the remaining amounts described in subparagraph (A)
as includable in the spouse's gross income for state purposes in the
taxable years of the spouse ending with or within the taxable years
of the individual in which the amounts would otherwise have been
includable.
   (ii) If the spouse of the individual described in subparagraph (A)
acquires the individual's entire interest in any Roth IRA to which
the qualified rollover contribution is properly allocable and fails
to make an election for federal purposes under Section 408A(d)(3)(E)
of the Internal Revenue Code, as amended by Public Law 105-206, or
revokes an election previously made for federal purposes under
Section 408A(d)(3)(E) of the Internal Revenue Code, as amended by
Public Law 105-206, to treat the remaining amounts described in
subparagraph (A) as includable in the spouse's gross income in the
taxable years of the spouse ending with or within the taxable years
of the individual in which the amounts would otherwise have been
includable, no election under this paragraph shall be allowed for
state purposes, subparagraph (A) shall apply for state purposes, and
a separate election for state purposes shall not be allowed under
paragraph (3) of subdivision (e) of Section 17024.5.
   (e) (1) If any portion of a distribution from a Roth IRA is
properly allocable to a qualified rollover contribution described in
Section 408A(d)(3) of the Internal Revenue Code, and the distribution
is made within the five-taxable year period beginning with the
taxable year in which the contributions were made, then Section 72(t)
of the Internal Revenue Code shall be applied as if that portion
were includable in gross income.
   (2) Paragraph (1) shall apply only to the extent of the amount of
the qualified rollover contribution includable in gross income under
Section 408A(d)(3)(A)(i) of the Internal Revenue Code.
   (f) Section 408A(d)(3)(D) of the Internal Revenue Code shall not
apply.
   (g) Section 408A(d)(4) of the Internal Revenue Code shall not
apply and in lieu thereof:
   (1) (A) Section 408(d)(2) of the Internal Revenue Code shall be
applied separately with respect to Roth IRAs and other individual
retirement plans.
   (B) For purposes of applying Section 408A of the Internal Revenue
Code, as amended by Public Law 105-206, this section and Section 72
of the Internal Revenue Code to any distribution from a Roth IRA, the
distribution shall be treated as made--
   (i) From contributions to the extent that the amount of the
distribution, when added to all previous distributions from the Roth
IRA, does not exceed the aggregate contributions to the Roth IRA, and

   (ii) From the contributions in the following order:
   (I) Contributions other than qualified rollover contributions to
which Section 408A(d)(3) of the Internal Revenue Code, as amended by
Public Law 105-206, applies.
   (II) Qualified rollover contributions to which Section 408A(d)(3)
of the Internal Revenue Code, as amended by Public Law 105-206,
applies on a first-in, first-out basis.  Any distribution allocated
to a qualified rollover contribution under this clause shall be
allocated first to the portion of the contribution required to be
included in gross income.
   (h) (1) Except as provided by the Secretary of the Treasury
(unless the Franchise Tax Board provides otherwise), if, on or before
the due date for any taxable year, a taxpayer transfers in a
trustee-to-trustee transfer any contribution to an individual
retirement plan made during the taxable year from that plan to any
other individual retirement plan, then, for purposes of this part,
the contribution shall be treated as having been made to the
transferee plan (and not the transferor plan).
   (2) (A) Paragraph (1) shall not apply to the transfer of any
contribution unless the transfer is accompanied by any net income
allocable to that contribution.
   (B) Paragraph (1) shall apply to the transfer of any contribution
only to the extent no deduction was allowed with respect to the
contribution to the transferor plan.
   (i) For purposes of Section 408A(d) of the Internal Revenue Code,
the due date for any taxable year is the date prescribed by law
(including extensions of time) for filing the taxpayer's return for
that taxable year.
   (j) For purposes of Section 408A of the Internal Revenue Code--
   (1) A simplified employee pension or a simple retirement account
may not be designated as a Roth IRA, and
   (2) Contributions to that pension or account shall not be taken
into account for purposes of Section 408A(c)(2)(B) of the Internal
Revenue Code.
  SEC. 2  The amendments made to Section 17507.6 of the Revenue and
Taxation Code by this act shall be operative for taxable years
beginning on or after January 1, 1998.
  SEC. 3.  This act provides for a tax levy within the meaning of
Article IV of the Constitution and shall go into immediate effect.
